Chapter 13 Financial management
Miller River Light is evaluating a project that will require an initial investment of $350,000. Miller River uses a 12% discount rate for capital projects of this type. What level of operating cash flows over a period of 5 years will cause the project to reach break−even NPV? Assume cash flows come in the form of an end−of−the−year annuity. A. $97,093.41 B. $92,329.12 C. $70,000.00 D. $86,690.54
A. $97,093.41
Betty Gilmore plans to sell berry pies at a local farmer's market. The permit and space rental will cost her $2,000 for the June through August season. The pies will sell for $7.00. Ingredients and overhead average $4.00 per pie. She also has to pay five percent of her gross sales to the markets's organizers. How many pies will she need to sell to cover her fixed costs? A. 755 pies with a very small profit on the last pie. B. 301 pies C. 667 pies with a very small profit on the last pie. D. She can never break even.
A. 755 pies with a very small profit on the last pie
Variable cost for Light.com's fluorescent tubes is $12.50, the tubes are sold over the internet to businesses and organizations for $20.00 each. Fixed costs are $7,500,000. $500,000 in depreciation expense is included in fixed costs. What is the cash break−even quantity for the fluorescent tubes? A. 933,333 B. 1,000,000 C. 1,066,667 D. 375,000
A. 933,333
Accounting break−even analysis solves for the level of sales that will result in A. net income = $0.00. B. Free cash flow = $0.00. C. IRR=Cost of Capital. D. NPV = $0.00.
A. net income = $0.00
There is a 30% probability that an office building will be sold after 5 years for $30 million, a 50% probability that it will be sold for $20 million and a 20% probability that it will be sold for $10 million. What is the expected value of the office building in 5 years? A. $30 million B. $21 million C. $10 million D. $20 million
B. $21 million
Variable cost for Light.com's fluorescent tubes is $12.50, the tubes are sold over the internet to businesses and organizations for $20.00 each. Fixed costs are $7,500,000. What is the break−even quantity for the fluorescent tubes? A. 375,000 B. 1,000,000 C. 600,000 D. 7,500,000
B. 1,000,000
The Oviedo Thespians are planning to present performances of their Florida Revue on 2 consecutive nights in January. It will cost them $5,000 per night for theater rental, event insurance and professional musicians. The theater will also take 10% of gross ticket sales. How many tickets must they sell at $10.00 per ticket to raise $1,000 for their organization? A. 1000 tickets B. 1,223 tickets C. 1,112 tickets D. There is not enough information
B. 1,223 tickets
Betty Gilmore plans to sell berry pies at a local farmer's market. The permit and space rental will cost her $2,000 for the June through August season. The pies will sell for $7.00. Ingredients and overhead average $4.00 per pie. She also has to pay five percent of her gross sales to the markets's organizers. How many pies will she need to sell to cover her fixed costs and realize a $3,000 profit? A. 752 B. 1,887 pies. C. 1,250 pies D. 1,667 pies
B. 1,887 pies
Charlestown Marina's forecasts indicate that if slip rentals equal $500,000, net operating income will be $25,000 and if rentals equal $525,000, net operating income will be $37,500. What is Charletown's degree of operating leverage? A. .10 B. 10 C. 2 D. .05
B. 10
Boulangerie Bouffard expects to sell 1 million croissants next year for $1.25 each. Variable cost of a croissant is $0.75. Fixed costs are $150,000, depreciation $200,000 and the tax rate is 25%. If the bakery can increase the price of a croissant to $1.50 and all other variables remain the same, free cash flow will increase by A. $150,000. B. $37,500. C. $187,500. D. $250,000.
C. $187,500
Excom Fiberoptics is bidding on contracts to sell micro test tubes for biotechnology research. in sets of 1,000 tubes. Fixed costs including depreciation associated with the project are $2,000,000, variable cost per set is $16. Excom expects to sell 250,000 sets. What is the minimum price it can charge and reach the accounting break−even point? A. $20 B. $8 C. $24 D. $12
C. $24
Enchanted Hearth expects to sell 1,200 wood pellet stoves in 2011 at an average price of $2,400 each. It believes that unit sales will grow between −5% and +5% per year and prices will rise or fall by as much as 5% per year. Forecast sales revenue for 2013 if the number of units sold increases by 5% per year and prices remain flat. A. $3,168,000 B. $2,880,000 C. $3,175,200 D. $3,333,960
C. $3,175,200
The Oviedo Thespians are planning to present performances of their Florida Revue on 2 consecutive nights in January. It will cost them $5,000 per night for theater rental, event insurance and professional musicians. The theater will also take 10% of gross ticket sales. How many tickets must they sell at $10.00 per ticket to break even? A. 1,223 tickets B. 1000 tickets C. 1,112 tickets D. There is not enough information
C. 1,112 tickets
Accounting break−even analysis uses A. free cash flows for a single period. B. free cash flows over the entire life of a project. C. sales, variable costs and fixed costs for a single period. D. sales, variable costs and fixed costs over the entire life of a project.
C. sales, variable costs and fixed costs for a single period.
Jake's Tree farm is evaluating a proposal to plant 5,000 ornamental trees at an initial cost of $10,000. The trees will be sold in 5 years. What is the minimum after tax cash flow from selling the trees that will allow the tree planting project to reach break even NPV? Use a discount rate of 12%. A. $12,000.00 B. $5,674.26 C. $17,958.56 D. $17,623.42
D. $17,623.42
Quineboag Textiles In. has calculated it's degree of operating leverage at 3.00. If Quineboag can increase sales from $5,000,000 to $5,250,000, operating income should increase from $500,000 to A. $515,000 B. $650,000 C. $1,500,000 D. $575,000
D. $575,000
Brookfield Heavy Equipment is considering a project that will produce after tax cash of $40,000 per year for 5 years. The project will require an initial investment of $144,191. At what discount rate will the project reach break−even NPV? A. 11.11% B. 10% C. 8% D. 12%
D. 12%
At the break−even NPV point A. The NPV of the project is equal to zero. B. the project's IRR is equal to the project's required rate of return. C. the present value of operating cash flows equals the initial amount invested. D. all of the above
D. all of the above
T/F Dudster company's DOL is 2. If sales increase by 10%, NOI will increase by 5%.
False